How could the new US corporate minimum tax affect companies?

The main revenue source in the US Senate's newly passed tax, climate and drugs bill is a novel 15% corporate minimum tax aimed at stopping large, profitable companies from gaming the Internal Revenue Service code to slash their tax bills to zero.

The nonpartisan Joint Committee on Taxation estimates that the new tax will add around $222 billion to US government coffers over the next 10 years, down from a previous projection of $313 billion after last-minute changes to the bill. It will apply to companies with more than $1 billion in "book income," the profits they report to shareholders before the effects of tax deductions and credits.

Here are some key details on how it would work:

What is the corporate minimum tax?

A wealth of deductions, credits and loopholes in the federal tax code has allowed some companies to report no income or negative income to the IRS while reporting strong profits to shareholders. Democratic President Joe Biden has repeatedly singled out Amazon.com Inc for paying little to no federal income tax despite billions of dollars in profits. 

If enacted, the tax will serve as a corporate version of the Alternative Minimum Tax for individuals, which prevents the wealthiest Americans from zeroing out their tax bills with investment losses and other deductions and credits.

The tax would likely apply to around 150 of the world's largest companies, according to a Joint Committee on Taxation analysis. These include large pharmaceutical companies and major corporations like Amazon, Apple Inc, Exxon Mobil Corp and Nike Inc, according to several think tanks that support the new tax. Amazon declined to comment on a potential tax increase. Apple, Exxon Mobil and Nike did not respond to requests for comment.

Companies that meet this threshold must calculate their taxes under both the 21% income tax regime and the 15% corporate minimum tax regime -- and pay the higher bill.

The tax would take effect next year and affect companies that earned an average of $1 billion in book income for three consecutive years. It would also apply to foreign companies that earn $100 million of book income in the United States.

What are the exceptions for companies?

Some regular corporate income tax credits and deductions are still allowed under the minimum tax, including credits for foreign taxes paid. The carrying forward of prior-year losses to offset future income is also permitted, but only 80% can be applied to reducing taxable income. Credits for research and development expenses are also allowed, with 75% of the value applied to reducing corporate minimum tax.

At the urging of Democratic Senator Kyrsten Sinema, lawmakers added a provision to preserve deductions on capital investments such as machinery, vehicles and buildings. The exception would allow companies to more quickly offset these expenses against tax bills.

Under another last-minute change to the legislation urged by Sinema, companies controlled by private equity firms are not subject to the corporate minimum tax if they make less than $1 billion of book income, even if that investment firm's combined portfolio of companies exceeds the threshold. Some private equity firms may be able to shift assets among companies in their portfolios so that each earns less than the $1 billion threshold to avoid the minimum tax.

Book income is calculated based on the income companies report to shareholders, and the new tax may give companies an incentive to lower the book income they report, law firm Baker Hostetler said in a recent note. They pointed to a nonpartisan Congressional Research Service report showing evidence of how past efforts to levy taxes based on book income compelled corporate taxpayers to manage their earnings and adjust book income to reduce taxes.

Large companies also could try to lobby the nongovernmental Financial Accounting Standards Board for favourable changes to the rules for calculating book income.